K. STOCK-BASED COMPENSATION

During fiscal 2011, the Company adopted the Twin Disc, Incorporated 2010 Stock Incentive Plan for Non-Employee Directors (the "Directors' Plan"), a plan to grant non-employee directors equity based awards up to 250,000 shares of common stock, and the Twin Disc, Incorporated 2010 Long-Term Incentive Compensation Plan (the "Incentive Plan"), a plan under which officers and key employees may be granted equity based awards up to 650,000 shares of common stock. The Directors' Plan may grant options to purchase shares of common stock, at the discretion of the board, to non-employee directors who are elected or reelected to the board, or who continue to serve on the board. Such options carry an exercise price equal to the fair market value of the Company's common stock as of the date of grant, vest immediately, and expire ten years after the date of grant. Options granted under the Incentive Plan are determined to be non-qualified or incentive stock options as of the date of grant, and may carry a vesting schedule. For options under the Incentive Plan that are intended to qualify as incentive stock options, if the optionee owns more than 10% of the total combined voting power of the Company's stock, the price will not be less than 110% of the grant date fair market value and the options expire five years after the date of grant. There were no incentive options granted to a greater than 10% shareholder during the years presented. There were no options outstanding under the Directors' Plan and the Incentive Plan as of June 30, 2014 and 2013.

The Company has 21,600 non-qualified stock options outstanding as of June 30, 2014 under the Twin Disc, Incorporated Plan for Non-Employee Directors and Twin Disc, Incorporated 2004 Stock Incentive Plans. The 2004 plans were terminated during 2011, except options then outstanding will remain so until exercised or until they expire.

Shares available for future options as of June 30 were as follows:

	2014		2013
2010 Long-Term Incentive Compensation Plan		500,121		539,566
2010 Stock Incentive Plan for Non-employee Directors		193,858		204,988

Stock option transactions under the plans during 2014 were as follows:

			Weighted		Weighted Average		Aggregate
			Average		Remaining Contractual		Intrinsic
	2014		Price		Life (years)		Value

Non-qualified stock options:

Options outstanding at beginning of year		21,600	$	14.88
Granted		-		-
Canceled/expired		-		-
Exercised		-		-

Options outstanding at June 30		21,600	$	14.88		3.94	$	392,298

Options price range ($ 5.73 - $7.19)

Number of shares		2,400

Weighted average price	$	6.23

Weighted average remaining life	1.00 years

Options price range ($ 10.01 - $27.55)

Number of shares		19,200

Weighted average price	$	15.96

Weighted average remaining life	4.31 years

The Company accounts for stock based compensation in accordance with ASC Topic 718-10, "Compensation – Stock Compensation." In addition, the Company computes its windfall tax pool using the shortcut method. ASC Topic 718-10 requires the Company to expense the cost of employee services received in exchange for an award of equity instruments using the fair-value-based method. All options were 100% vested at the adoption of this statement.

During fiscal 2014, 2013 and 2012 the Company granted no non-qualified stock options. As a result, no compensation cost has been recognized in the Consolidated Statements of Operations and Comprehensive Income for fiscal 2014, 2013 and 2012, respectively.

The total intrinsic value of options exercised during the years ended June 30, 2014, 2013 and 2012 was approximately $0, $539,000 and $1,002,000, respectively.

In fiscal 2014, 2013 and 2012, the Company granted a target number of 43,154, 28,255 and 15,449 performance stock unit awards, respectively, to various employees of the Company, including executive officers are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 25,943. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock unit awards granted in fiscal 2014. The performance stock unit awards granted in fiscal 2013 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2015. The performance stock unit awards granted in fiscal 2013 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 23,449. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock unit awards granted in fiscal 2013 and has reversed previously recognized expenses related to these awards during the second quarter of fiscal 2013. The performance stock unit awards granted in fiscal 2012 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance stock units that can be awarded if the target objective is exceeded is 16,457. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock unit awards granted in fiscal 2012 and has reversed previously recognized expenses related to these awards during the second quarter of fiscal 2013. There were 41,160, 42,962 and 133,479 unvested performance stock unit awards outstanding at June 30, 2014, 2013 and 2012, respectively. The weighted average grant date fair value of the unvested awards at June 30, 2014 was $23.18. The performance stock unit awards are remeasured at fair-value based upon the Company's stock price at the end of each reporting period. The fair-value of the stock unit awards are expensed over the performance period for the shares that are expected to ultimately vest. The compensation expense (income) for the year ended June 30, 2014, 2013 and 2012 related to the performance stock unit award grants, approximated $0, $1,238,000 and $(631,000), respectively. At June 30, 2014, the Company had $1,331,000 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2014 and 2013 awards. The total fair value of performance stock unit awards vested in fiscal 2014, 2013 and 2012 was $0, $2,787,000 and $2,068,000, respectively. The performance stock unit awards are cash based, and are thus recorded as a liability on the Company's Consolidated Balance Sheets. As of June 30, 2014, there were no awards included in "Liabilities" due to actual results to date and the low probability of achieving any of the threshold performance levels. As of June 30, 2013, these awards are included in "Accrued liabilities" ($2,787,000) due to the awards having a performance period ending in less than one year.

In fiscal 2014, 2013 and 2012, the Company granted a target number of 17,312, 28,535 and 15,335 performance stock awards, respectively, to various employees of the Company, including executive officers. The performance stock awards granted in fiscal 2014 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2016. The performance stock awards granted in fiscal 2014 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 20,774. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock awards granted in fiscal 2014. The performance stock awards granted in fiscal 2013 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2015. The performance stock awards granted in fiscal 2013 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 32,880. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock awards granted in fiscal 2013 and has reversed previously recognized expenses related to these awards during the second quarter of fiscal 2013. The performance stock awards granted in fiscal 2012 are subject to adjustment if the Company's economic profit for the period falls below or exceeds the specified target objective, and the maximum number of performance shares that can be awarded if the target objective is exceeded is 17,689. Based upon actual results to date and the low probability of achieving the threshold performance levels, the Company is not accruing the performance stock awards granted in fiscal 2012 and has reversed previously recognized expenses related to these awards during the second quarter of fiscal 2013. There were 44,712, 42,141 and 102,391 unvested performance stock awards outstanding at June 30, 2014, 2013 and 2012, respectively. The fair value of the stock awards (on the date of grant) is expensed over the performance period for the shares that are expected to ultimately vest. The compensation expense for the year ended June 30, 2014, 2013 and 2012, related to performance stock awards, approximated $0, $209,000 and $838,000, respectively. The weighted average grant date fair value of the. The performance stock unit awards granted in fiscal 2014 will vest if the Company achieves a specified target objective relating to consolidated economic profit (as defined in the Performance Stock Unit Award Grant Agreement) in the cumulative three fiscal year period ending June 30, 2016. The performance stock unit awards granted in fiscal 2014 unvested awards at June 30, 2014 was $22.51. At June 30, 2014, the Company had $1,007,000 of unrecognized compensation expense related to the unvested shares that would vest if the specified target objective was achieved for the fiscal 2014 and 2013 awards. The total fair value of performance stock awards vested in fiscal 2014, 2013 and 2012 was $0, $2,055,000 and $1,671,000, respectively.

In addition to the performance shares mentioned above, the Company has unvested restricted stock outstanding that will vest if certain service conditions are fulfilled. The fair value of the restricted stock grants is recorded as compensation over the vesting period, which is generally 1 to 3 years. During fiscal 2014, 2013 and 2012, the Company granted 51,004, 83,729 and 43,620 service based restricted shares, respectively, to employees and non-employee directors in each year. A total of 3,000 and 30,532 shares of restricted stock were forfeited during fiscal 2014 and 2013, repectively. There were 116,297, 186,469 and 250,323 unvested shares outstanding at June 30, 2014, 2013 and 2012, respectively. Compensation expense of $1,184,000, $1,234,000 and $1,435,000 was recognized during the year ended June 30, 2014, 2013 and 2012, respectively, related to these service-based awards. The total fair value of restricted stock grants vested in fiscal 2014, 2013 and 2012 was $3,053,000, $2,177,000 and $977,000, respectively. As of June 30, 2014, the Company had $1,145,000 of unrecognized compensation expense related to restricted stock which will be recognized over the next three years.